Is Europe Drifting Into a Summer Lull?

By Tom Fairless

Even before the latest “crunch” European Council summit begins Thursday, officials are already playing down expectations that it will provide an answer to the region’s two-year-old debt crisis.

Unrealistically high expectations for the long-anticipated summit will inevitably lead to disappointment, European Central Bank governing council member Ewald Nowotny warned Monday.

Any decisions about Greece’s bailout package will have to wait until after the Troika have prepared their report on the state of Greece’s reforms, Austria’s finance minister, Maria Fekter, said Tuesday.

That report has been delayed amid sickness in the Greek camp.

Greece’s new prime minister, Antonis Samaras, will miss this week’s summit after undergoing eye surgery, while the country’s designated finance minister, Vassilis Rapanos, resigned on Monday for health reasons. The summit will be attended instead by Greece’s foreign minister and outgoing finance minister.

But even if the report on Greece were available, governments remain deadlocked over the way forward. While some continue to push for common euro-zone bonds or a banking union, Germany remains staunchly opposed to any mutual insurance without a strong fiscal and political union

“Liability and control aren’t allowed to be unbalanced,” German Chancellor Angela Merkel said Monday. Her finance minister, Wolfgang Schaeuble, complained last week about ever new proposed solutions “as if we hadn’t made precise agreements long ago.”

However, creating a fiscal union would take time and require treaty changes. And it is not clear that all euro-zone governments would be willing to give up sovereignty.

Barring a dramatic worsening of the crisis, it is not clear why Ms. Merkel should change her position. Although confidence indicators suggest that Germany’s economy is facing crisis-related headwinds, unemployment remains at a two-decade low and consumer sentiment is robust, according to research group GfK.

Ms. Merkel’s opposition to loosening Germany’s purse strings is also popular among domestic voters, as well as at the country’s central bank.

But with almost a third of euro-zone states now seeking financial aid and yields on Italian and Spanish bonds hovering around all-time highs, a clear path out of the crisis is desperately needed.

If Germany won’t help in the short term, who will? Some European leaders are once again looking to the ECB to take a more-active crisis-fighting role, by re-starting its government bond-buying program or lowering interest rates.

And indeed, an interest rate cut may be on the cards. Last week, ECB executive board member Benoit Coeure said the bank is likely to discuss lowering its main interest rate at its July 5 council meeting.

But while a rate cut might boost confidence, it would arguably do little to relieve stress on peripheral euro-zone governments and businesses.

Stronger ECB action, meanwhile, looks unlikely. Mr. Coeure warned that the ECB shouldn’t now restart its bond-buying program or launch another long-term refinancing operation similar to the two three-year tenders it held around the turn of the year.

That opposition to further unconventional measures was repeated Sunday by the Bank for International Settlements—an organization of global central banks—which warned that such measures could create other problems if carried out for too long.

With governments and central banks at odds over the way out, a deal before Europe’s traditional August vacation looks increasingly unlikely.